TFOA Insights

Since TFOA’s inception in 2007, we’ve found there are two basic motivations for single family offices to join our private family office peer network. Some are looking for a safe place for support and advice for matters ranging across operations, structure, design, governance, and long-term planning. Others are looking for like-minded families to co-invest with on direct investments, where they can share their expertise and benefit from proprietary sources of deal flow.

Over the years we’ve learned much from our members about what drives them, the advantages they bring to direct investing, and their approaches to direct investing operations. While TFOA’s membership represents a small fraction of the total family office universe, their insights align well with the growing body of knowledge around what makes family office direct investing successful (or not). To share some of these hard-earned insights, we conducted a survey of our members over a two week period in June 2022, with a series of questions about their direct investing habits.

The concept of the Multi Family Office (“MFO”) appears to offer the best of all possible worlds for a wealthy family who isn’t ready (or perhaps large enough) to start a Single Family Office (“SFO”) of their own. Under one roof it promises a convenient repository for all documentation, reduced overhead, consolidated buying power, diversified risk management, plus economies of scale and talent. But despite their theoretical promise, in practice an MFO must manage a complex set of conflicting interests while simultaneously navigating a financial industry that is largely focused on short-term gains rather than creating long-term value.

The literature typically frames MFOs as a stepping stone between traditional wealth management for the mass-affluent and a robust single-family office solution for the ultra-wealthy. We believe the perspective most needed – and often conspicuously absent – is from the perspective of the family itself. What organizational, operational and investment advantages might an MFO offer the family and how can a family identify those traits within an industry that is often opaque by design? This whitepaper offers an analysis of the challenges both families and MFO’s face; as well as a set of practical principles and concepts to help families who are vetting Multi Family Offices for their financial, investment and other needs.

While the landscape of the family office industry is changing, one certainty is that the Multi Family Office space will continue to grow. This is true for a number of reasons, including the changing demographics of wealth, new attitudes toward risk management, and market-based pressures to find new ways to scale the Single Family Office market to a broader segment of the population. While these new vistas are exciting, not every adaptation will be successful. These emerging trends in the family office space make a deeper study into what makes a Multi Family office successful both timely and important. [1]

“Fear of Missing Out” (aka FOMO) is that anxious feeling of not being included in something with others, such as an interesting or enjoyable activity. The concept was originally used to describe social behavior, a form of self-inflicted peer pressure to participate in social activities. More recently the term has been taken up by the behavioral finance community to describe how investors follow the trades of others in order to “not miss out” on the next big thing. FOMO is a common experience, but in the world of investing it is usually associated with poor decision-making. After all fear rarely provides a solid basis for clear, rational decision making.

According to UBS’ 2021 Global Family Office Report, 13% of family office respondents have already invested in cryptocurrencies, and an additional 15% have it under consideration.[1] Family offices are ahead of institutional investors, who are just now beginning to dip their toes into the space, but the asset class still remains outside a traditional asset allocation. As family offices continue to develop their post covid allocation strategies in parallel with the increasing awareness and adoption of digital assets from a broad spectrum of investors (from retail to institutional), it is more important than ever for families to consider how digital assets may or may not fit into their allocation strategies. To that end we would like to offer some perspectives to help frame how family offices might approach the topic.

Here is a familiar story for family office investment teams: an email arrives, perhaps from a principle looking to learn more about an opportunity; or a deal comes through trusted advisors or the CIO. A family office management team wants to make sure they thoroughly investigate the opportunity in order to provide value to the family. Resources are allocated, introductory phone calls are made, and before long a young analyst is writing up reports on an industry she’s not familiar with, while trying to model an aspirational J-Curve into something that approximates reality. Weeks might be dedicated to such an opportunity before it becomes clear this is not a good fit for the family office. Now imagine emails like that coming in on a daily basis.

According to PitchBook-NVCA Venture Monitor, 2019 saw a record-setting decade in venture, with a 5x increase in deal value to roughly $140 billion.[i] It’s an exciting space filled with the promise of tomorrow, but it is also uncertain, filled with risks, and for many marked with embarrassing failures. A disciplined, proactive approach allows a team to mitigate the risks and maximize their upside, while also providing a singular opportunity for learning and leadership development. Despite all of the bad experiences we’ve all had with early stage investments, there is a real opportunity to bring value to the family office by creating a disciplined approach that fosters exceptional returns, as well as internal learning and skills development.

Here is a familiar story for family office investment teams: an email arrives, perhaps from a principle looking to learn more about an opportunity; or a deal comes through trusted advisors or the CIO. A family office management team wants to make sure they thoroughly investigate the opportunity in order to provide value to the family. Resources are allocated, introductory phone calls are made, and before long a young analyst is writing up reports on an industry she’s not familiar with, while trying to model an aspirational J-Curve into something that approximates reality. Weeks might be dedicated to such an opportunity before it becomes clear this is not a good fit for the family office. Now imagine emails like that coming in on a daily basis.

According to PitchBook-NVCA Venture Monitor, 2019 saw a record-setting decade in venture, with a 5x increase in deal value to roughly $140 billion.[i] It’s an exciting space filled with the promise of tomorrow, but it is also uncertain, filled with risks, and for many marked with embarrassing failures. A disciplined, proactive approach allows a team to mitigate the risks and maximize their upside, while also providing a singular opportunity for learning and leadership development. Despite all of the bad experiences we’ve all had with early stage investments, there is a real opportunity to bring value to the family office by creating a disciplined approach that fosters exceptional returns, as well as internal learning and skills development.

The structure of your SFO will depend on the jurisdiction(s) in which it will operate and the types of investments the family owns or intends to own…

Many SFOs in the USA are structured as limited partnerships or limited liability companies and are organized similarly to hedge fund management companies (i.e. the SFO entity does not own any of the assets it manages; rather, it is a service entity that provides services to the SFO’s clients on a contract basis). It is highly recommended you engage with experienced securities counsel who have worked with other family offices regarding the potential impact of SEC rules on their structure and operations.

Governance is an important issue for any professionally run Single Family Office (“SFO”). Indeed, an SFO that is intended to serve a family for generations is well advised to develop and implement an effective and appropriate governance structure that can significantly enhance the long-term success of the office.

At its core, governance is simply a set of procedures that define how an SFO will make decisions. For governance to be effective, the owners, overseers (board of directors or advisors) and executive management must be informed, understand their respective roles and responsibilities, and run the SFO accordingly.

Many SFOs fail to invest in the robust technology infrastructure needed to optimize their capabilities, either due to a lack of execution or a lack of awareness around available solutions. Here are six key technology needs for SFOs, along with a roadmap for the five key activities required for meeting those needs.

The people that comprise the team who oversee and manage the SFO will be the most critical factor in the ultimate success of the family office. While staff can be hired and fired, having a stable and high functioning team is desirable, if not essential.  There’s an old adage in the family office world that “an SFO is either the best place in the world or the worst place in the world to work, and it all depends on the family and how they treat the people that work for them”. If you want great talent, who will stay with you over the long term, you should expect to treat them well and pay them competitively. There may be a trade-off, in terms of a better lifestyle at a family office versus corporate America and Wall Street, but great talent will only stay if they are treated well and compensated fairly.

Given the importance of talent, the family should strongly consider interviewing and selectively working with one or multiple recruitment professionals that have experience with staffing senior SFO positions.  With any position, there needs to be a clearly defined mandate and job description, a process for hiring and a due diligence investigation conducted for all potential hires. An employee handbook outlining protocols and procedures drafted by an employment attorney is recommended in addition, the attorney needs to draft non-disclosure and privacy documents for all interviewees and further documentation, including employment agreements, for all hires.

While most SFOs are founded to provide investment and concierge services for the family, perhaps the most important role of the SFO is to monitor and manage risk. With all investments and related activities managed by a single team, the SFO is in a better position than any individual family member, advisor, or external service provider to measure risk systematically and ensure SFO assets are protected.

Most SFOs draw on the expertise of a variety of outside advisors, including lawyers, accountants, bankers, insurance providers, investment advisors, philanthropic consultants, and information technology specialists, among others.  Seeking advice when needed, contracting for services, and coordinating the efforts of these specialists is a major responsibility of the SFO.

A well-run SFO will have a clear process for selecting and vetting advisors.  While many members of the SFO team will have experience working with various service providers, it is important for the team to have clear procedures for selecting advisors to avoid conflicts of interest or playing favorites. Many SFOs establish budgets for advisor-related expenditures on an annual or more frequent basis, thereby prioritizing needs and giving SFO staff clear parameters for defining the scope of each project with advisory team members. Performance of existing advisors should be reviewed frequently to ensure the services they provide are of high quality and appropriate to the problems the SFO faces.

The philosopher Zeno of Elea produced a set of logical, but also impossible statements known today as “Zeno’s Paradoxes.” The most enduring of these is the arrow paradox, which states that an arrow in motion must always arrive at the halfway point before it reaches its goal. According to this logic, no arrow will ever reach its target, but instead will cross an infinite number of increasingly small bisections. From 430 BC to today, this paradox has pushed the limits of critical thinking and reasoning.

Zeno’s arrow offers an important lesson for any family office developing or implementing a consolidated reporting platform. In the world of consolidated reporting, Zeno’s arrow flies true: there is always an insurmountable gap between the desires for the platform and the reality of what any single platform can accomplish. Two reporting challenges, the mix of assets and the nature of unrealized gains, exemplify this gap.

This whitepaper argues that the most sustainable and adaptive solution for any family office reporting system is less a “consolidated reporting platform” and more a “comprehensive reporting system.” Our shift in terms demarcates a move away from a single software solution and toward a reporting and communications team-based approach; one that uses software as well as traditional business practices in order to provide clear and effective communication to family office stakeholders.

All major faith traditions, ethical systems, and moral codes emphasize the importance of charitable giving. Saint Paul puts it succinctly: “He which soweth sparingly shall reap also sparingly; and he which soweth bountifully shall reap also bountifully.” The stoic philosopher and Roman statesman Seneca offers a complimentary view: “We should give as we would receive, cheerfully, quickly, and without hesitation; for there is no grace in a benefit that sticks to the fingers.”

The highest goal then is to give cheerfully and without hesitation. However, the modern cynic, and probably you and I, for justifiably prudent reasons, would counter that one must also give responsibly. The joy of giving is easily crushed when donations produce little change or, worse, are wasted or stolen. By the same logic, increasing your philanthropic allocation will not proportionally increase your joy. Developing an informed approach is crucial.

To help your assessment of your own family office’s approach to philanthropy, we offer four assessment ‘metrics’ for consideration. These metrics are qualitative in nature and are meant to inspire critical thinking and analysis. Alongside these metrics is a heuristic that offers one way to think about portfolio construction. The most important take away comes from the ancients themselves: giving should be joyful. If you are happy and content with your giving practices, then continue in your path as a joyful giver.

John D. Rockefeller retired in 1897, at 56 years old, having accumulated more private wealth than anyone in the history of capitalism. His retirement from for-profit enterprise made way for an equally vigorous career as a philanthropist. As a devout Baptist, he believed that it was his duty to continue working, but now instead of trying to make profit, he sought enterprises that would allow him to give his money away. What we might refer to as “The Rockefeller Model,” divides one’s career into two distinct halves: a career of wealth accumulation and a career of charitable activity. More contemporary philanthropic standards, like The Giving Pledge, and the rise of large foundations sponsored by family wealth, exist within, and expand upon the Rockefeller model.

While that model will continues to this day, with Bill Gates as the obvious modern day analog to John D Rockefeller, a new paradigm is emerging, with a set of practices that are reconfiguring how people think about business, capitalism, wealth accumulation, philanthropy, ethics, investments, returns, and value. Terms like “conscious capitalism,” “double bottom line,” “impact investing,” “environmental, social, & governance investing (ESG),” “sustainability,” “mutual aid,” “shareholder vs stakeholder outcomes” are introducing a new lexicon into the world of philanthropy and investing. The result is that the bright line between for-profit business and mission-driven philanthropy is becoming murkier and murkier every day.

In a generous reading of the situation, entrepreneurs and analysts are asking good-faith questions about the relative efficiency of capital. They ask, is it possible to structure a for-profit business in a way that would relieve the pressure for philanthropic activity altogether? Would that not be a more efficient use of traditional corporate capitalism? In a less generous reading, these activities greenwash (sometimes dubious) investments with marketing designed to pull at the heartstrings and make it appear a little more tolerable to allocate good money into questionable deals[1].

While it’s useful to keep the good faith and bad faith renditions of these arguments in mind, the primary purpose of this whitepaper is focused on understanding the landscape of impact investments, and defining what is often a vague and ill-defined nomenclature, in order to help family office investment teams navigate these murky waters. In the face of a rapidly changing environment, it’s all the more important to understand the ground you’re standing on. In the context of impact investing, that means being able to make distinctions between the major trends in impact investing in order to develop your own methodology for incorporating these ideas into your diligence process. It’s also important to maintain a bright line distinction between for-profit and not-for-profit activity. While the landscape around for-profit business is evolving, that is no excuse to simply collapse mission driven goals together with for-profit activity. At their root, these designations are important tools in your total balance-sheet, especially as you’re looking to optimize tax efficiency.

New and established single family offices are beset on all sides with family office networking opportunities. Most of the self-proclaimed family office networks are run for-profit, with a few  notable ‘non-commercial’ exceptions. Some of the networks look like multi-family offices, or loosely affiliated groups of family offices; others are simply trying to cobble together industry-specific conferences or deal platforms. When it comes to the issue of how best to navigate these networking opportunities, we recommend a Marxist approach. Not Karl, but Groucho: “Refuse to join any club that would have [you] as a member.”

Groucho’s self-deprecating criticism of club culture reminds us to always proceed with skepticism and caution. His humorous refrain raises a question about the core intention of any club that is targeting you as their ideal member. This question should always be at the front of one’s mind when considering joining any  family office network or community or attending any family office conference.

The world of family offices is growing, but it is still relatively small. While multiple reports have put the number of family offices around the world in 2019 at around 7,300 — which represents about a 38% increase over the last two years — we believe the number of true single family offices to be considerably smaller.[1] This small, asset rich, but growing market has seen a precipitous rise over the past five years in the number of networks, clubs, and associations that claim to connect and serve family offices.

When you think about starting a family office or implementing a leadership change at your existing family office, the people you hire will determine to a large extent in what direction you go, and how successful you are. Of course, “if you don’t know where you’re going, any road will take you there.” George Harrison’s 1988 paraphrase of a famous exchange between Alice and the Cheshire Cat in Through the Looking Glass (1871) offers a cautionary lesson for any leader that does not have a clear vision for their organization.

While family offices come in many shapes and sizes, one universal experience is that everyone working in a family office has at one time heard or said the following platitude: “Once you know one family office, you know one family office.” We term this popular saying “the first law of family offices.” Besides acting as a universal introduction for any family office plenary session, this phrase succinctly distills one of the core truths of family offices: all families, and therefore family offices, are inherently different[1]. The phrase is more than an empty platitude. In fact, it encapsulates an entire philosophy for family office professionals and therefore merits a more careful reading.

First generation families who are in the process of building a family office often receive the same piece of conventional wisdom: that family wealth passes from “shirtsleeves to shirtsleeves in three generations.” A punchier version is also frequently said: “Generation one makes it, Generation two spends it, Generation three blows it.” But where does this ‘universally accepted,’ conventional wisdom come from? And why is it so ubiquitous among family office service providers and wealth advisors in the marketplace?

From the outside looking in, The Family Office Association (“TFOA”) is a close-knit network of single family offices, whose combined net-worth rivals that of a sizeable nation-state. the truth, however, is more nuanced and much more interesting. TFOA was not born of a grand vision, but instead emerged as an unintended consequence of a chance meeting between a small group of single family office executives, who met at the offices of a storied Texas law firm in 2007 to interview a series of eager fund managers and service providers.

While a mind-boggling number of groups have emerged in recent years to capitalize on the craze of family office wealth management, TFOA has put stakeholder experience and relationships above short term monetization and has chosen to focus on creating a pure peer network of like-minded family office executives, essentially for free. This is in part due to TFOA’s founding principles of privacy and non-solicitation, but also due to an inherit understanding that when one tries to monetize a network like this, what makes the network valuable, trusted, and special, can quickly disappear.

Viewed in this light, the story of TFOA provides as case study into the challenges of conscious capitalism, a movement led by entrepreneurs and business leaders who seek to elevate the human condition through business by orienting business around all attendant stakeholders.

Creating an SFO to fit your family’s specific needs and circumstances requires considerable thought and   preparation. Families considering forming an SFO should put together a motivated group of family leaders and trusted advisors to lead the planning effort, with input from outside specialists, as necessary. The following, while not totally comprehensive, serves as a helpful checklist to get started.